Strengths

Products used in many industries across the world, notably in electrical battery manufacturing

Weaknesses

Low production capacity rates across the world

Increased pressure from Chinese authorities to reorganise the steel and aluminium industries

Highly dependent on Chinese economic policy

Weak growth in global vehicle sales

Risk assessment

Highlights

The metal sector is facing many difficulties amid the ongoing trade tensions between China and the United States. After the US imposed tariffs on imports of steel (25%) and aluminium (10%) from several countries, including China, but also allies such as the European Union, Canada, Mexico and Japan, US steel prices temporarily came under upward pressure and rose by 21.7% between December 2017 and July 2019. Nevertheless, according to SteelHome, average monthly steel prices in the United States, China and Europe fell by 28%, 12% and 18% respectively between November 2018 and November 2019, due to the economic downturn. Iron ore prices likewise fell by 21% in November 2019 after surging at the beginning of 2019 on reduced Brazilian supply.

Copper prices, which act as a leading economic indicator of trends in the global economy, fell by 3.3% between December 2018 and November 2019 and are deteriorating. Prices of other base metals and alloys show mixed trends. Nickel increased by 40% during the end-December 2018 to November 2019 period due to the interest in electric car batteries. Zinc, aluminium and cobalt prices followed copper downward, dropping 7%, 7.5% and 35% respectively.

Steel is also viewed as a barometer of global activity due to its use in several industrial activities, including construction, the automotive industry and consumer goods such as household appliances. Accordingly, it is examined in further detail below.

Sector Economic Insights

The deteriorating economic outlook in most regions is expected to continue to weigh on the global steel market

The US Treasury put China on its list of currency manipulators, a move that is unlikely to help the two sides reach an agreement in their trade war. In addition, Coface expects global economic growth to reach 2.5% in 2019 and 2.4% in 2020, compared to 3.2% in 2018. As a result, the steel sector, which is highly dependent on global economic conditions, is expected to witness high price volatility, complicating the task of purchasing managers. This situation will be compounded by the fact that client sectors, notably the automotive and construction sectors, are facing difficulties owing to their procyclical nature. Global steel consumption is thus expected to increase modestly by 0.9% in 2020. World steel production is expected to follow a similar trend, with a growth of 0.5% in 2020.

The 2019 economic slowdown will continue in 2020, with Coface forecasting growth of 1.1% in the Eurozone. Apparent steel consumption fell by 7.7% in the second quarter of 2019, according to EUROFER, an industry association. The negative trend in steel demand is the result of the continued collapse of the EU manufacturing sector, particularly in the automotive sector, of which the production index is falling sharply due to the decline in vehicle registrations. The situation on the European steel market has been aggravated by significant imports of steel products which, combined with the fall in demand, in a setting of global overcapacity, have inevitably led to lower domestic prices. The safeguard measures adopted by the European Union to provide protection in the context of the world trade war have proven ineffective. For this reason, many European steelmakers, including companies with leadership positions in high value added steels, saw their turnover and profits decline overall in the third quarter of 2019.

After expanding by 2.9% in 2018, the US economy is expected to grow by 2.3% in 2019 but only 1.3% in 2020, according to Coface’s forecasts, due in particular to the repercussions of the trade war and weaker levels of investment among corporate clients. US protection measures saw imports of steel products reduced by 11% year-on-year in September 2019 and also drove an increase in steel production (4% year-on-year in October 2019). However, US steel prices have been falling since the beginning of 2019, keeping step with the slowdown in demand, as reflected in the industrial production index, which is beginning to weaken (-0.2% year-on-year in November 2019). As a result, steel demand is expected to stall in 2020 while production is expected to decrease by 0.8%.

The Chinese steel market will be slightly impacted by the gradual slowdown in domestic economic activity, with economic growth estimated by Coface at 5.8% in 2020, against 6.1% in 2019 and 6.6% in 2018. The Chinese steel sector has benefited from public spending on infrastructure and construction, which supported steel consumption and production during the first half of 2019. Despite the problems in client sectors, particularly the automotive and real estate sectors, which have negatively affected steel prices, Worldsteel, a trade association, forecasts that Chinese demand for steel will increase by 1% in 2019 compared to 2018, and that production will go up by 1.2% before steadily declining in 2020 owing to moderate consumption. Demand for steel in the construction, energy and automotive sectors is expected to decline in 2019, while demand in the machinery, shipbuilding, household appliances and rail sectors is expected to continue to grow. Illustrating this, car sales tumbled in 2018 (-4.6%) and 2019 (-4% in October) and are likely to continue on this trend in 2020. The real estate market is also slowing, with housing starts showing negative year-on-year growth of -2.2% in June 2019.

India’s consumption of steel products is forecasted to grow by 6% in 2019 due to strong public support for infrastructure projects on the one hand, and the manufacturing sector, which has boosted domestic consumption, on the other. This trend is set to continue in the medium term. In 2020, India’s steel production is expected to grow by 2.2%.

The development of and appetite for electric vehicles (EV) are fuelling growth in demand for nickel and aluminium (which is used to reduce vehicles’ weight), up to about 5.9% on average through to 2021

Steel still has cost advantages over other alternatives such as aluminium and composite materials. In addition, one of the main risks to nickel and aluminium demand in connection with the development of electric vehicles is that EVs themselves face challenges. Sales of EVs will not replace combustion vehicles in the short term, due to various factors such as fairly high price levels, consumer concerns about vehicle range, which is perceived to be too short, and charging times.